Poland was the first centrally planned economy in Eastern Europe to leave the Soviet bloc and introduce systemic reforms in all sectors of the economy. The transformation of the National Bank from a monobank to an institution of a market-based system and the Polish financial sector into a market-oriented banking system was an important element of the reform process and received strong support from the IMF and the international community. This paper describes the steps taken by the National Bank, analyzes the monetary situation, and makes recommendations.

The turning point of economic reforms to move Poland away from the centrally planned system of the postwar era occurred in October 1988 when a new government was appointed to fight inflation, reduce shortage of goods, and accelerate reform in virtually all sectors of the Polish economy. Following a social “round-table” discussion held in the first quarter of 1989, a political commitment to build a market-oriented system in Poland was formally introduced in the final agreement. The Polish economic reform affected all key sectors of the economy, particularly enterprises, prices and wages, agriculture, fiscal, foreign trade and exchange system, and banking.

Enterprises

Enterprise reform emphasized (1) autonomy and self-management, (2) property rights, (3) financial discipline, and (4) promotion of competition and development of a private sector. The central economic administration was streamlined. All industrial branch communities, except those dealing with hard coal and energy, were consolidated under the Ministry of Industry. In January 1989 the Government passed a law splitting the capital of each state enterprise into a portion owned by the state Treasury and a portion regarded as the enterprises’ own property, with the ultimate objective of transferring the state enterprises into joint-stock companies. Some financial discipline on state enterprises was introduced, and an office was created in early 1988 under the Ministry of Finance to break up the monopolistic power of the enterprises.

Prices and Wages

By December 1989, administrative prices, previously set by the Government, were abolished, and only four food products continued to be administered. Subsidies on all other food products and ceilings on increases in contract prices were also formally abolished. At the industrial producers level, more than half of producer prices were market based. Wages and labor market in general were also gradually liberalized and geared as much as possible to improving efficiency by linking them to market prices and performance.

Agriculture

Official agricultural procurement price ceilings were removed in April 1989. In addition to the abolition of price ceilings on agricultural procurement, the state monopoly in the procurement of most basic agricultural and food products was eliminated in early 1989.

Fiscal

Fiscal reform of both revenue and expenditure sought to limit the expansion of the monetary base in order to reduce inflation. On the revenue side, tax reforms streamlined the structure of the taxation system and changed the taxation of wages and enterprise profits. On the expenditure side, several measures limited the government deficit beginning in 1989, mainly by reducing subsidies. The state budget deficit, which had been entirely financed by the banking system in 1985–88, was financed by treasury bills (for the first time) and by an advance subscription by the National Bank of Poland to be converted into bonds in 1990. The first issuance of treasury bills occurred in the last quarter of 1989. The bills were bearer instruments, had a six-month maturity, and were issued at a fixed discount.

Foreign Trade and Exchange System

Reforms were gradually introduced to eliminate the monopoly of the 60 Foreign Trade Organizations that used to centralize and carry out the bulk of all foreign trade activity via the license and quota system. Also, in December 1988, a new law was introduced authorizing joint ventures with foreign participation of up to 100 percent without a requirement that the director of the enterprise be a Polish citizen. These enterprises were free to set wages and to repatriate foreign currency profits above the 15 percent surrender requirement to the banking system.

The official exchange rate of the zloty against convertible currencies was determined on the basis of a weighted basket of currencies. As a result of high domestic inflation, however, the real effective exchange rate experienced frequent devaluations. The complex retention scheme, comprising about 1,000 rates ranging from 10 percent to 50 percent, was considerably simplified and liberalized in 1989 to 5 retention rates, ranging from 10 percent to 50 percent depending on the type of export. At the end of 1989, Polish residents and nonresidents were allowed to hold foreign currency accounts, and foreign currency receipts from exports had to be surrendered in part to the Polish foreign exchange banks while capital controls were in effect. The January 1, 1990, Foreign Exchange Law permitted unrestricted purchase of foreign exchange at the official rate from the banking system to pay for all imports. In addition, households became eligible to make all other payments through the parallel exchange market, in which the exchange rate continued to be determined freely by supply and demand without official intervention. As before, enterprises could not participate in that market. Households could continue to hold and accumulate foreign exchange in their convertible accounts.

The exchange retention privileges and foreign exchange auctions, introduced in May 1987, were eliminated and export proceeds were from then on to be fully surrendered to the domestic banking system, although enterprises could retain balances accumulated previously in their foreign exchange retention accounts. The system of supplementary export incentives (tax reliefs, export subsidies, preferential credits) was abolished.

The changes in the exchange system were accompanied by the unification of the customs tariff, the introduction of selective import surcharges, and measures to liberalize trading concessions and licensing requirements for exports and imports. A revised law on joint ventures also entered into effect on January 1, 1990. It provided inter alia for an extension of the initial tax holiday from three to four years.

Banking

The transformation of the banking sector began in early 1982 when, as part of the package of economic reform, a new banking law provided more autonomy to the banking sector, particularly the National Bank.

Monobank System, 1982–85

Under the 1982 law, the National Bank of Poland was no longer formally subordinated to the Ministry of Finance. The President of the National Bank was authorized to prepare a credit plan for approval by the Council of Ministers and the Parliament. Although the plan had to be consistent with the national economic plan, it represented a major step toward recognizing the role of the National Bank in gauging the appropriate credit expansion of the banking sector. Even though the new law expanded Parliament’s influence over monetary policy, it also opened the possibility of establishing new banks. A council of banks was created and chaired by the President of the National Bank of Poland, and a Bankruptcy Law was enacted to strengthen the bank’s role in enforcing credit contracts.

As central bank, the National Bank of Poland issued currency, acted as the Government’s bank, refinanced other banks, held the official reserves of gold and part of the official foreign exchange reserves, administered the foreign exchange regulations, and, in consultation with other banks, prepared the annual credit plan. The National Bank also provided commercial services to the public. It was the largest commercial and savings bank, providing banking services to socialized and nonsocialized enterprises through an extensive network of branches and to households through a similar network of so-called National Savings Banks. Over two thirds of household and enterprise banking transactions were carried out with the National Bank. The bank’s branches operated almost as separate units.3 There was no daily consolidation of the accounts of the National Bank. Because groups of enterprises were assigned to specific branches to conduct their banking services, there was very little competition, particularly in credit activities.

Besides the National Bank, Poland’s banking system comprised three other stated-owned major banks: Bank Handlowy Warsaw, the Bank Polska Kasa Opieki SA, and the Bank of Food Economy.4 An Export Development Bank was established in December 1986 as a joint-stock company to provide credits, primarily in foreign currency for export-related purposes.

Bank Handlowy was a commercial bank dealing almost exclusively with the socialized sector, providing over 95 percent of settlement services with respect to foreign trade transactions in domestic and foreign currencies. It held virtually all foreign currency deposits of the socialized sector and the largest share of the official foreign exchange reserves. Bank Handlowy contracted most of Poland’s foreign debt and was responsible for making external debt-service payments. Correspondingly, over three quarters of its liabilities were in the form of foreign debt.

The Bank Polska Kasa Opieki SA specialized in providing foreign exchange services to the household sector. It held foreign-currency-denominated deposits of residents—constituting about two thirds of its liabilities—and most of the accounts of nonresidents. It had the authority to extend and also to contract loans in foreign currencies and, in addition, to finance domestic operations involving the sale of consumer goods, real estate, and services against payments in convertible currencies. The bulk of its assets, however, consisted of deposits with the National Bank and Bank Handlowy.

The Bank of Food Economy provided commercial banking services to socialized agriculture and to the food processing industry. It also acted as the central organizational, financial, and audit unit for a network of over 1,600 associated cooperative banks and provided them with refinancing facilities. The cooperative banks, in turn, specialized in providing commercial banking services to the nonsocialized agricultural sector, to the rural population, and to rural socialized enterprises.

The banking system in Poland was a reflection of the socialist influence of the former Soviet Union. Financial assets consisted almost exclusively of currency and bank deposits (including foreign currency). There was no capital market and only a few bonds were issued in 1985 by some socialized enterprises. During 1981–86. MI accounted for more than half of broad money, and cash amounted to about 23 percent of broad money. The socialized sector accounted for about 35 percent of the total money stock. Deposit notes were administered and raised occasionally. Savings notes on one-year deposit were raised from 6.5 percent a year to 10 percent in 1982, and remained unchanged until 1988 when they were increased to 25 percent; with inflation ranging around 20 percent until 1987 and 60 percent in 1988, deposit rates remained considerably negative in real terms.

In a socialist environment, bank credit was the main source of financial resources. Credit was allocated according to priority areas and criteria set by the authorities. For example, the share of credit outstanding to the socialized sector, largely for working capital expenditures in the industrial sector, averaged about 80 percent during 1982–87.

Reform, 1986–89

Following the banking reform of 1982 described earlier, additional concrete steps toward establishing a modern banking sector were taken in 1986 when the Export Development Bank was created and in 1987 when the National Bank’s Savings Department was converted into a savings bank. However, the Banking Act for Commercial Banks and the National Bank of Poland Act of January 31, 1989, represented a turning point. Under the latter act, the two-tier banking system was officially introduced in Poland. The National Bank became a full-fledged central bank with the power of “issuing banknotes and coin of the Republic of Poland, granting refinancing credit to other banks, accepting deposits, setting financial accounts, organizing foreign exchange transactions in accordance with the provisions of the Foreign Exchange Act, providing banking services for the Treasury and performing other operations as provided in the Act.”5 The bank’s terms of reference included6

participating in determining the Government’s economic policy and in the implementation thereof, pursuant to the relevant acts and resolutions adopted by the Sejm;

initiating and pursuing monetary policy, including foreign-exchange policy, guided by recommendations of the Sejm;

overseeing the correctness of banking practices and the development of the banking system; and

pursuing the interests of the state in its cooperation with international banking institutions and foreign banks.

Under Article 79 of the same act, the National Bank of Poland was divested from all commercial activities and was to “cede to other banks by June 30, 1992, on terms agreed with the latter, the handling of corporate and consumer accounts, including the provisions of consumer services involving foreign currency and foreign exchange.”

As a result, the National Bank transferred its commercial banking functions to nine state-owned commercial banks. The shifting of the monobank system in Poland was based on three variables (volume of transactions, volume of credits, and number of accounts). On that basis, the number of banks and the number and location of branches for each bank by geographical region were decided. A computer simulation was used for this purpose. Under the new legislation, private domestic and foreign banks were also allowed to be licensed and conduct business in Poland. By November 1989, seven new banks and four representation offices of foreign banks were authorized.

The network of the National Bank was considerably downsized and the central bank retained the Warsaw headquarter’s office and 49 district branches scattered throughout the national territory. The special and independent status of the bank was codified in a constitutional amendment in 1989. Apart from assuming typical central bank functions, the 1989 law introduced some important changes to the status of the National Bank, such as the acquisition of accountability to the Parliament. The National Bank was required to present to the Parliament a credit plan in conjunction with the annual budget, but it was entitled to increase or decrease its size depending on economic circumstances. In addition, the President of the National Bank was going to be appointed by Parliament upon nomination by the State President, similarly to the appointment of the Prime Minister.

Another major event providing additional independence to the National Bank occurred in the revised National Bank of Poland Act of January 1990 (which was passed in December 1989 and went into force in January 1990), giving broad powers to the National Bank to conduct monetary policy and limiting its advances to the Government to a strict limit of 2 percent of budgeted expenditures. This excluded central investment projects, which became eligible for special National Bank refinancing activities.

The January 1990 Act opened the door to the full building of the National Bank of Poland as a modern central bank.